According to a former chief economist of the International Monetary Fund, there is a good chance that the US economy will slide into a recession within the next year.
“A recession late this year or early next year is better money,” said Maurice Obstfeld, a professor of economics at the University of California, Berkeley and former chief economist at the International Monetary Fund. , in an interview with MarketWatch on the sidelines of the Federal Reserve’s summer retreat in Jackson Hole.
On Friday, Fed Chairman Jerome Powell said the United States was likely to see below-trend growth as the central bank raised its benchmark interest rate in an attempt to bring inflation down, but said avoided using the word recession.
See: Fed’s Powell says lowering inflation will hurt households and businesses in Jackson Hole speech
Powell began to argue that households would feel “pain” from the crunch, but he didn’t quite refer to the “blood, sweat and tears” that could come, Obstfeld said.
Consumer inflation stands at an annual rate of 8.5%, its highest level in forty years.
At the same time, the US labor market is solid, with an unemployment rate of 3.5% and wages rising by more than 5% per year.
Economists point out that the Fed must cool the labor market in order to control inflation.
But it won’t be easy, Obstfeld said.
“The labor market is very dynamic. We probably need to see further significant hikes in the fed funds rate to bring it down,” he said.
Obstfeld said the Fed’s benchmark rate will likely need to move to a range of 4.5% to 5%.
Currently, the Fed’s benchmark interest rate is in the range of 2.25% to 2.5%.
Essentially, there is a risk that the Fed will have to tighten the brakes on the economy to bring down inflation.
If that happens, the unemployment rate is unlikely to hit just 4%, Obstfeld said.
The recession could be shallow, somewhat similar to the economy following the September 11, 2001 attack on the World Trade Center.
It turned out that the economic downturn following that attack “wasn’t that bad”, but it took a long time for the labor market to recover, he said.
Looking back, the economic outlook is very volatile and it’s hard to know which way events will unfold, Obstfeld said.
In itself, the dispersion of results weighs on business and consumer confidence, Obstfeld said.